Bank of Utica is an 86-year old institution doing business in upstate New York. The bank operates only a single branch in downtown Utica, yet its balance sheet holds $912 million in assets and $727 million in deposits against $155 million in equity capital. Bank of Utica is controlled by the Sinnott family through a controlling stake in the bank’s voting shares.
Bank of Utica follows an unusual strategy. Most banks take deposits and originate loans, making their income on the interest rate spread, less loan losses. This process requires a host of loan officers and staff and all the associated salaries, office space, software and compliance costs. It also requires ongoing monitoring and management, plus additional expenses when a portion of the loan book inevitably sours.
Bank of Utica doesn’t bother. The bank takes deposits, then turns around and buys liquid debt securities like treasuries, municipal bonds, mortgage-backed securities, foreign bonds and others. Nearly 70% of these securities have maturities of three years or less, which greatly reduces interest rate risk. The yields on these assets may not be as robust as the yields on loans the bank could originate, but their credit risk is extremely low.
Bank of Utica does originate and run a small book of commercial, personal and real estate loans, but the loan origination business is clearly not the bank’s focus. For example, the bank’s only first position mortgage product is a 15 year fully-conforming loan at 4.95%, fully 1.50% above the national average. Bank of Utica will originate loans, but only opportunistically and on its own terms.
At quarter’s end, Bank of Utica’s net loan book was $47 million. Its securities holdings were $848 million. Interest on these securities accounted for 92% of Bank of Utica’s interest income for the first half of 2013.
Bank of Utica’s credit risk is extremely low due to its conservative investment policies. On top of this, the bank is highly over-capitalized. Bank of Utica’s common equity ratio is 17.04%. This figure includes nearly $20 million in unrealized gains, some of which are likely to disappear if interest rates rise. Excluding unrealized gains entirely, the bank’s common equity ratio is still a strong 15.20%.
Despite its conservative investing and over-capitalized balance sheet, Bank of Utica still manages good returns on assets and equity. For the last four quarters, the bank averaged a 10.00% annualized return on equity, and an average annualized return on assets of 1.60%. A big reason for these solid returns despite minimal leverage is Bank of Utica’s efficiency. With minimal staff and need for infrastructure, the bank’s operating expenses are very, very low. Operating expenses ate up only 25% of the bank’s net interest income over the past year, an almost absurdly low figure. Many banks struggle to keep this figure below 70%.
Bank of Utica’s geographic home is not the nation’s fastest-growing region, but the bank has still managed to grow its deposit base at a modest rate. Over the last five years, deposits grew at an annual rate of 3.9%. Deposits are the “fuel” that allow a bank to invest in additional earning assets and increase the bottom line.
Bank of Utica’s credit quality, capital position and efficiency are all high, but its valuation is not. The bank has two share classes outstanding. BKUT is the voting share class and is majority-owned by the Sinnott family. BKUTK is non-voting. There are 50,000 voting shares and 200,000 non-voting for a total of 250,000. The voting shares trade at a slight premium to the non-voting. I can’t imagine why an investor would pay up for the voting shares with no possibility of exerting influence, so I’ll concentrate on the non-voting shares, which last had a bid price of $420.00.
Bank of Utica has common equity of $621.76 per share, giving the non-voting shares a price to book ratio of just 67.6%. Trailing earnings per share are $63.24 for a trailing P/E of 6.64. These ratios are far too low for a bank of this quality and profitability.
Bank of Utica does not release financial statements on its website. If anyone is wondering where I found them, try here. When it comes to investing in banks, FDIC call reports are your best friend!